The investment philosophy of legendary fund manager Peter Lynch focuses on finding well-run, growing companies trading at reasonable prices, a strategy often called Growth at a Reasonable Price (GARP). Lynch supported a long-term, buy-and-hold method, concentrating on businesses with sustainable earnings growth, strong financial health, and valuations that do not overpay for future prospects. His system stresses fundamental checks over market timing, looking for companies that an investor can understand and hold with confidence for ten years or more.
A recent filter built on Lynch's main criteria has identified one such candidate: Urban Outfitters Inc (NASDAQ:URBN). The retailer, known for its Anthropologie, Free People, and namesake brands, seems to match several important parts of the GARP method.
Sustainable Growth Profile
A central part of Lynch's strategy is finding companies with a consistent and sustainable growth path. He specifically cautioned against very high growth rates, which are often not maintainable, preferring instead a steady, predictable rate.
- Earnings Per Share Growth: URBN's EPS has increased at an average yearly rate of about 15.5% over the past five years. This fits within the Lynch-preferred range of 15-30%, showing a healthy, controlled growth rate instead of a very fast speed that could point to future instability or letdown.
- Revenue Expansion: Supporting this earnings increase, the company has grown its revenue by 11.1% over the past year and shows a predicted rise in sales growth looking forward. This mix of solid past performance and a positive future view is key for long-term investors looking for durable compounders.
Attractive Valuation Metrics
Lynch was careful about valuation, famously using the PEG ratio (Price/Earnings to Growth ratio) to find stocks where the price paid is justified by the growth rate received. A PEG ratio of 1 or less was a main signal of a reasonable price.
- PEG Ratio: With a PEG ratio based on past growth at 0.9, URBN meets this important Lynch test. This implies the market may not be completely valuing the company's historical growth, possibly offering an entry point for value-aware growth investors.
- General Valuation: The wider valuation picture supports this view. URBN trades at a P/E ratio of 13.9 and a forward P/E of 11.9, which are not only below the current S&P 500 averages but are also lower than most of its peers in the Specialty Retail industry. This provides a margin of safety, a concept important to all fundamental strategies inspired by Lynch.
Financial Health and Profitability
Lynch required his investments to be on solid financial ground, with strong balance sheets and high returns on capital. This makes sure a company can endure economic downturns and fund its own growth without high risk.
- Debt-Free Balance Sheet: URBN has no debt on its balance sheet, resulting in a Debt/Equity ratio of 0. This strong financial position gives significant operational flexibility and removes the risk linked to interest payments or refinancing, a quality Lynch would have valued highly.
- Strong Returns: The company produces a solid Return on Equity (ROE) of 18.1%, easily passing Lynch's 15% threshold. This shows management is effectively using shareholder capital to generate profits. Also, its Return on Invested Capital (ROIC) of 12.0% is higher than its cost of capital, confirming it is creating real economic value.
Fundamental Summary
A review of Urban Outfitters' detailed fundamental report gives the stock a high overall score of 7 out of 10. The report notes an "excellent profitability rating" along with "great financial health properties," ending with the conclusion that URBN shows "a decent growth rate in combination with a cheap valuation." This combination of quality, health, growth, and price is exactly the profile long-term GARP investors look for.
A Candidate for Further Research
Urban Outfitters presents a strong case study of a stock that meets a quantitative filter based on Peter Lynch's ideas. Its mix of sustainable mid-teens earnings growth, a debt-free balance sheet, high profitability, and a reasonable valuation, as shown by a below-1 PEG ratio, makes it a notable candidate for investors using a long-term, fundamentals-based strategy.
For investors interested in examining other companies that fit this disciplined method, the full Peter Lynch strategy filter is available for more study. You can find more screening results and adjust the parameters here.
Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation, or an offer to buy or sell any security. Investing involves risk, including the potential loss of principal. You should conduct your own thorough research and consider consulting with a qualified financial advisor before making any investment decisions.
